While most mortgage rates are heading lower, people looking to buy or refinance a more expensive house may be out of luck.
That's because the market for so-called jumbo loans—mortgages of more than $417,000 in some areas but over $729,750 in others—is still feeling the worst of the credit crisis. In some cases, the spread between conventional mortgages and jumbo rates is a full point or more.
"I don't see the situation for jumbo rates improving for more than a year or two," says Bob Walters, chief economist for QuickenLoans. "What you need is for the housing market to stabilize. Until that happens, jumbo rates will be high."
Recent government efforts to free up the mortgage market are aimed primarily at conventional loans, not jumbo mortgages. As a result, banks have little incentive to either offer or refinance jumbos.
And while conventional mortgages can still be sold off by banks and bundled into mortgage-backed securities, there is no such market for jumbo loans, which is also keeping rates higher, says Mark Goldman, a real estate lecturer and mortgage broker with Windsor Capital Investments.
"The secondary market is dead," says Goldman. "Fannie Mae, Freddie Mac and Ginnie Mae are getting propped up by the government for conventional loans. But portfolio lenders for bigger loans are not getting any kind of funds. There's no political benefit to support funding what some people think are 'rich people's' homes."
That lack of a secondary market means lenders are forced to carry the loans on their books. That makes lending and qualifying for a loan much tougher in the current real estate market, says Peter Grabel, a private mortgage banker with Luxury Mortgage in Stamford, Connecticut.
"The jumbo market has gotten much tougher in the last few months," says Grabel. "The guidelines and qualifications to lend are harder and so are the guidelines for borrowers."
Getting a loan
Despite the higher rates, loans are still being made. Grabel says he recently did a jumbo loan for $3 million with a 7 year ARM at a rate of 5.25 percent and no points. However, the homeowner had to put down 40 percent to get the deal.
"People at one time could get up to 80 percent of a loan," says Grabel. "Not anymore. The higher the loan amount now, the higher the down payment."
And for those looking to re-finance, losing value in their homes hurts when they might plan to use the equity for a downpayment. Worse, a home now worth less than the current loan, could leave a homeowner facing the difficult task of finding any lender willing to give them a new loan, experts say.
Grabel also cites today's sagging job market as a hindrance to potential borrowers. "A lender didn't approve a jumbo loan because the couple worked in the same industry," Grabel says. "That was too much risk of default if both got laid off."
What will change the market
As for what might actually lower jumbo rates, analysts say it comes down to a change in business practice and psychology. "Confidence and transparency need to come back to the market," says Goldman. "No one will jump into jumbo loans unless everyone is getting a good idea of the risk in the housing market. Underwriting guidelines need to be clear and concise."
Luxury's Grabel agrees. "When people have confidence in the housing market, there are many more players in the system."
And as housing values go, so too go the number of loans, says Quicken's Walters. "Prices need to settle for at least one to two months straight," says Walters. "Then lenders might not be so afraid to have jumbo loans on their balance sheets."
Whether rates come down or stay the same, Grabel says jumbo loans are still a pretty good bargain. "Yes, rates are higher, too high, but I still think rates are fairly good for borrowers in today's market," says Grabel.
And at least one analyst says jumbo loans currently present a missed business opportunity.
"The jumbo loan market is tremendously undeserved," Goldman says. "It's a great opportunity for lenders. Too many high quality borrowers have been squeezed out of the system and that's too bad."